Jobs and the minimum wage

Sky-high unemployment numbers are having a clarifying effect on the legislative preferences of our elected representatives. After a singular focus on health care reform consumed much of 2009, the House and Senate have now turned their attention to our country’s employment problems. Most recently, the Senate passed two separate “jobs” bills that provide hiring tax credits for employers and extend unemployment benefits.

While well-intentioned, I’m afraid that such legislation won’t be much help for young and less-experienced Americans who are still out of work. As an economist who has spent the last two decades studying the unintended consequences of labor market policies, I can confidently say that the best medicine to cure the employment ills of these Americans would be revisiting the 40 percent increase in the minimum wage that Congress passed in 2007.

While accepting economic realities about popular policies like the minimum wage can be painful, there are few better motivations than this: The unemployment rate is 9.7 percent nationwide, but among teens the number is more than two-and-a-half times higher. African-American teens have it even worse; they are facing a truly daunting 43.8 percent unemployment rate, and that doesn’t count those who have stopped looking.

Last year, David Neumark, a well-known labor economist at the University of California Irvine, warned prophetically that allowing the third of three planned wage increases to occur in the midst of the recession could cost us an additional 300,000 jobs.

Neumark’s academic findings on the minimum wage echo work I did with American University professor Joe Sabia. Most recently, we looked at the experiences of two states: New York and Pennsylvania. The former raised its minimum wage, the latter did not. New York saw significant decreases in employment for teens and other less-skilled workers – Pennsylvania did not.

This conclusion was hardly shocking, as Neumark and Federal Reserve economist William Wascher report in their book Minimum Wages. The vast majority of studies by economists over the last two decades have found that increases in the minimum wage are associated with substantial decreases in employment and no reduction in poverty among the working poor.

So how does a government-mandated wage actually deter hiring? Picture an independently owned gas station and its teenage employees – you probably remember having seen them in the past. With the price of labor at an already-high $7.25 per hour, the gas station manager might keep a staff of two attendants for the daytime shift: one to run the cash register in the convenience store, and one to stock the shelves, clean the restrooms and keep an eye on the pumps.

If a future minimum wage hike means the station has to pay those same employees $9.50 per hour (as President Barack Obama promised during his campaign), that’s an extra $13,140 in annual payroll costs, just for the day shift. At a 24-hour station, those labor costs would be $39,420 – and that’s not even counting the higher payroll taxes. So what does the manager do? Simple: cut back to one attendant and hope that customers don’t notice the bathroom has only been mopped in the distant past.

There are roughly 160,000 gas stations nationwide, and raising the minimum wage may not lead to layoffs at all of them. But if just one in ten gas stations lays off (or does not replace) an employee, that wipes out an additional 16,000 entry–level jobs and the opportunity to get started in building a work history.

Sadly, the longer teens are absent from the labor force, the worse off they become. Teenagers experiencing long stretches of unemployment are likely to end up with less income later in life, and are more likely to become entangled in the criminal justice system.

In their rush to do something to help out-of-work Americans, our legislators missed an important piece of the employment puzzle: entry-level employees won’t be hired unless employers can pay them entry-level wages. I don’t pretend to have a panacea for all that ails our economy. But I do know that policies based on the assumption that businesses can be forced to pay workers more than their skills are worth turn out to hurt those that they claim will most benefit from them.

Burkhauser is the Sarah Gibson Blanding professor of economics at Cornell University.